As Microsoft increases its spending to do battle with Google for leadership in online advertising and hosted applications, a Microsoft patent application published on Thursday shows the company contemplating free computers and software for its customers.

The patent application details the possibility of free computers for Microsoft's online customers. It suggests "a service provider such as a telephone company, an Internet service provider, or a leasing company may provide computer systems or components to users at a reduced charge or for free in exchange for targeted advertising delivery."

In such a scenario, Microsoft would presumably work with hardware and ISP partners, subsidizing the cost of hardware and service with online advertising revenue.

A Microsoft spokesman declined to comment further on the patent application.

But at a meeting of financial analysts at Microsoft's Redmond, Wash., headquarters on Thursday, Kevin Johnson, co-president of Microsoft's platforms and services division, demonstrated the company's commitment to advertising technology as a source of revenue. He showed off Microsoft adCenter serving ads to Microsoft's Xbox Live online service and discussed Microsoft's acquisition of Massive, a developer of technology for delivering ads inside video games. Johnson projected that Microsoft's online services would see revenue growth ranging from 7% to 11% in fiscal year '07, rising to $2.5 billion to $2.6 billion from $2.3 billion in fiscal year '06.

In exchange for free computing hardware and service, the patent application details how users would have to pay in information. "Resources on the computer system itself, such as the operating system, identify user characteristics and interests based on information stored on the computer," the patent application explains. "A user profile may be developed using information such as music preference, language, and game usage."

The patent application proposes sharing user information with an advertising provider, either directly or through a service provider, to allow for targeted ad delivery, both online and offline.

Another embodiment of the proposed technology specifically envisions an ad-supported operating system, without free hardware. "For example, an operating system may be provided by an operating system developer for free," the patent application says. "Users may then receive advertisements for use of the free operating system. User who do not wish to view advertisements may purchase a full license. Users willing to receive ads but desire less obtrusive advertising delivery, may opt to purchase a limited license or subscription for the operating system."

Scott Linzer, director of media for interactive marketing agency iCrossing, suggests that if this patent gets commercialized, it will benefit Microsoft's online advertising market share. "Microsoft's effort has been increasing," he observes. "Clearly they are trying to be a larger player in the marketplace."

Linzer says that as a result of Microsoft's increasing online advertising efforts, his agency has been raising client awareness of Microsoft's adCenter. "They still have, obviously, a smaller market share than Google," he says. "If Microsoft makes a larger push to attract more searchers, obviously that will create more search advertising opportunities for our clients."

Whether or not Microsoft ends up developing the technology described in this patent application, Linzer believes better ad targeting is coming. "All of the engines, really in the last year, have done a much better job with their targeting efforts," he says. "In the next year, from all the engines, we'll see far better techniques for the marketer to target demographically."